Monday, March 21, 2011

California cap-and-trade plan faces setback

* State must assess cap-and-trade alternatives

SAN FRANCISCO/WASHINGTON, March 21 (Reuters) - California did not adequately consider alternatives to its plan to create a cap-and-trade market for carbon emissions, a judge ruled on Monday, throwing a wrench into the most aggressive U.S. effort to combat climate change.

The state's regulator on climate change matters, the Air Resources Board (ARB), will need to consider other possibilities to meet state environmental law, San Francisco Superior Court Judge Ernest Goldsmith wrote in an opinion.

In particular he said that the state had not made a thorough examination of putting a tax on carbon.

"ARB seeks to create a fait accompli by premature establishment of a cap and trade program before alternatives can be exposed to public comment and properly evaluated by ARB itself," he ruled.

California has forged ahead with its climate change plan, arguing it will attract new "green" business as it improves the environment, and environmentalists see its success as key to any future U.S. federal effort. Key to California's plan is to establish a limit on total greenhouse gas emissions and let companies and power plants trade for the right to pollute.

The court case in question, though, is by "environmental justice" groups who seek to make sure environmental regulation benefits the least wealthy parts of society.

'THIS COULD BE HUGE'

One analyst saw a potential major effect of the ruling.

"This could be huge," said Jon Costantino, a senior advisor with law firm Manatt, Phelps & Phillips in Sacramento and former climate change planning manager at the Air board.

If ARB is able to complete the analysis this summer and go forward with the cap and trade rulemaking, the decision would only amount to a "bump in the road", he said.

"But it could be more problematic if ARB can't satisfy the court's concerns by October" -- the key deadline for adoption of the cap-and-trade regulation, he added.

Plaintiffs in the case challenged the plan, fearing it would inadvertently increase air pollution in some pockets of the state.

With carbon trade due to start in California in 2012, it was not immediately clear if the ruling would threaten that schedule.

Air Resources Board Chairman Mary Nichols at a conference last week dismissed fears by many market participants that the lawsuit would delay the start of the program.

"The lawsuit is not a factor in terms of delay. It's just part of what you have to go through to implement a program," she said.

In a statement on Monday the board said it would appeal the ruling and that it would respond to the court's order, relying on a previously written 500-page environmental analysis that it said addressed the judge's concerns.

The judge, who directed plaintiffs to draft a formal order, or writ of mandate, made clear that cap-and-trade rulemaking should be put on hold but also indicated other measures in the state's master document of climate change measures, called the Scoping Plan, could be held up.

"We are clarifying the scope of the judge's order," the board said, arguing that slowing down other measures in the Scoping Plan, such as energy efficiency and clean car standards, was at odds with the court's focus on cap-and-trade.

"A broadly worded writ puts at risk a range of efforts to move California to a clean energy economy and improve the environment and public health," it said.

But Alegria De La Cruz, lead attorney for the group challenging the state's process, said that the judge clearly wanted a real discussion of alternatives. By holding out the possibility of slowing programs beyond cap-and-trade, it had given her side room to negotiate with the state.

"The order gives us lots of room to play there," she said, rebuffing Nichols' view that the suit was not a big concern.

"It's not an exercise in futility," she said by telephone.

The particular issue regards a document called a Functional Equivalent Document (FED) prepared to assess environmental consequences of the Scoping Plan, which sets out cap-and-trade goals.

"In order to ensure that ARB adequately considers alternatives to the Scoping Plan and exposes its analysis to public scrutiny prior to implementing the measures contained therein, the court must enjoin any further rulemaking until ARB amends the FED in accordance with this decision," the judge wrote.

De La Cruz estimated that the process of a new analysis, public review, state response to public comments, and adoption of the new document could take three and a half to five months.

The Association of Irritated Residents, the plaintiffs in the case, hailed the decision.

"This ruling will compel ARB to fully consider those of us most affected by its decisions, and not just move forward in its haste to make major polluters happy," Association President Tom Frantz said in a statement.

The judge also rejected another challenge to cap and trade, which was part of the same case. That challenge was specifically related to the state's 2006 climate change law, known as AB 32.